The Role of Policy and

Industry Structure in India's

Oilseed Markets
Suresh Persaud and Maurice R. Landes

Introduction

Oilseeds and oilseed products emerged during the 1990s as one of the
fastest growing components of global and U.S. agricultural trade, with
developing countries accounting for most of the growth in both supply and
demand. Many developing countries—including the rapidly expanding
economies of China and India—have become the principal source of growth
in demand for feed proteins and edible oils. And following a period of rapid
production growth, soybean products from Latin America and palm oil from
Southeast Asia now meet most of the growth in oilseed product demand.

U.S. exports of oilseeds and oilseed products—mostly soybeans and

products—now account for declining shares of global trade in these products.
This stems largely from the comparative advantage of Latin American soy-
bean and Southeast Asian palm oil producers (Schnepf et al., 2001). Policies
that affect production, trade, and processing in importing and exporting
countries have also affected trade growth and the mix of raw materials and
processed products that is traded. For example, government land, credit, and
export tax policies support the expansion of production and processing infra-
structure for soybeans in Latin America and palm oil in Southeast Asia. In
China, rising incomes and trade policy reforms have fueled rapid growth in
demand for vegetable oil and feed protein, as well as its shift from an
importer of oilseed products to an importer of raw materials.

India is the world’s second most populous country, the third largest econo-
my in Asia, and one of the world’s fastest growing developing economies
since 1990. India is also a major producer and consumer of oilseeds and
their products, emerging in the late 1990s as one of the world’s largest
importers of vegetable oils. Higher incomes, low productivity in domestic
oilseed production, and more liberal policies for edible oil imports have
driven expanding trade. Despite more open oil import policies, extensive
policy intervention continues to affect oilseed production, trade, and pro-
cessing in India, and policy change is likely to play a major role in the
future growth and composition of India’s oilseed and product trade.

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 India’s Oilseed Sector

India, the world’s seventh largest producer of oil crops (2001-03 average), is
a major producer of soybeans, rapeseed, peanuts, cottonseed, and sunflow-
erseed and their derived products. India is traditionally an importer of veg-
etable oils and an exporter of protein meals, but a negligible trader in
oilseeds. Oil imports have been on the rise as a result of strengthening con-
sumer demand and import liberalization measures implemented in 1994.
During 2001-03, India was the second largest edible oil importer in the
world, behind the European Union (EU-25) and ahead of China. India is
also the world’s fifth largest exporter of oil meals, although exports of soy-
bean and other meals have slowed due to rapid growth in domestic feed
demand. And, despite substantial excess capacity in the domestic oilseed
processing industry, imports of oilseeds remain restricted by tariff and non-
tariff policies (Dohlman et al., 2003).

Oilseed Product Demand

India has been among the fastest growing developing economies since the
late 1980s, with real growth in gross domestic product (GDP) averaging
more than 6 percent annually. Rising incomes and steady growth in urban-
ization are stimulating demand for a more diverse array of foods, including
fruit, vegetables, edible oils, milk, eggs, and poultry meat. Demand for
these products is now outpacing demand for traditional food staples.

India’s improved growth has been accompanied by a dramatic improvement

in its balance of payments—once a chronic source of weakness. Although
a large current account deficit persists, increased export competitiveness
associated with more liberal trade and domestic policies has improved
India’s capacity to import and to borrow foreign capital. The improved pay-
ments position provides more flexibility for additional import liberalization.

Figure 1
Edible oil consumption, imports, and prices, India
Million tons 1981/82=100
14 140

12 120

10 100

8 80

6 60

4 40

2 20

0 0
1979 81 83 85 87 89 91 93 95 97 99 01 03 05
Consumption Imports Real domestic price index
Source: USDA Production, Supply, and Distribution database; Economic Survey,
Government of India.

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Oil demand. Indian edible oil consumption is now growing at more than 6
percent annually, but per capita consumption (9.6 kg) remains below the
world average of 11.1 kg. Most oil is used in food preparation, mostly in
the home, but also in food shops, restaurants and, to a lesser extent, food
processing firms. Driving consumption growth has been rising incomes and
a more open trade regime, which has led to increased edible oil supplies and
lower domestic prices (fig. 1). In 1994, India shifted from a restrictive state
trading regime for oil to unrestricted imports (subject to tariffs) by private
traders. Although tariffs remain high, imported oils—mostly palm and soy-
bean oils—have accounted for most of the growth in consumption.
Together, these nontraditional imported oils now account for about half of
the oil consumed in India, replacing the higher priced, domestically pro-
duced oils such as peanut and rapeseed oil.

Indian consumers spend a large share of their income on food—about 55

percent compared with just 10 percent in the United States (USDA,
2005a)—and are generally highly responsive to prices. Middle- and lower
income consumers, in particular, substitute items in and out of the diet
based on relative prices. Despite high tariffs, prices for edible oils—led by
imported palm and soybean oils—have tended to decline compared with
other foods since the early 1990s, stimulating increased per capita oil con-
sumption (fig. 2).

Meal demand. Faster income growth is also strengthening demand for ani-
mal products and the derived demand for coarse grain and oil meal for feed-
ing. India has a large animal product sector, and both supply and demand
have responded to stronger income growth. Since the early 1990s, the dairy,
poultry, egg, and aquaculture sectors have registered strong expansion. The
dairy sector—now the world’s second largest after the EU-25—is expanding
at 4 percent annually, eggs at nearly 5 percent, poultry meat at 12.5 percent,
and freshwater fish production at 6.1 percent.

Figure 2
Oil consumption in India by major type
Million tons
12
Palm
10 Soybean
Sunflower
8 Peanut
Rapeseed
6 Cottonseed
Coconut
4

0
1973 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05
Source: USDA Production, Supply, and Distribution database.

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Figure 3
Growth in Indian feed demand
Index (1980=100)
5,000
4,500
4,000
Soybean meal
3,500
Other oil meal
3,000 Corn
2,500 Other cereals

2,000
1,500
1,000
500
0
1980 82 84 86 88 90 92 94 96 98 00 02

Source: FAOSTAT, May 2005.

The surge in animal product production has been accompanied by accelerat-

ed growth in feed use (fig. 3). The poultry and egg sectors—which rely
heavily on rations of corn and soybean meal—have been the main drivers of
commercial feed demand. During 1990-2001, feed demand for corn and
soybean meal grew at annual rates of 21 percent and 17 percent.

The consumer-driven emergence of India’s animal products sector, and

accompanying growth in demand for commercial feeds, is significant for the
future development of India’s oilseed and products industry. Historically,
returns to oilseed processors and producers have been undermined by weak
domestic demand for oilseed meals for feed purposes. Since meals account
for the largest physical fraction of most oilseeds, poor market returns from
meal have tended to reduce the profitability of processing and returns to grow-
ers. Meal exports have buoyed demand and prices for soybeans and soybean
meal, but most other meals face weak domestic and export demand and are of
1 Indian rapeseed varieties are high in
poor quality, with significant shares traditionally disposed of as fertilizer.1
glucosinolates (a growth inhibitor in
The expanding domestic feed market may reduce India’s exportable surpluses
livestock) and indigestible fiber, and
of meal, but also strengthen the returns to domestic oilseed production and low in metabolizable energy and key
processing and improve the quality of the meal produced. amino acids. They also contain erucic
acid, which causes liver necrosis and
Oilseed and Product Trade thyroid enlargement. Indian peanut
meal is low in quality due to aflatoxin,
which results from poor postharvest
The role of trade in India’s oilseed economy is determined primarily by
handling.
trade policy (see box). India’s recent large imports of edible oil have been
the result of reduced border protection beginning in 1994. Oilseed imports,
though no longer restricted by quantitative measures, are prevented by pro-
hibitive tariffs and sanitary regulations. Exports of oil meals have been
aided both by traditionally weak domestic feed demand and by the implicit
support that the protected oil market affords to domestic oilseed processors.

Edible oil trade policy. From the 1970s until 1994, most edible oil imports
were conducted by the Government’s State Trading Corporation, with annu-
al import quantities determined by an interministerial committee based on

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 India's Oilseed and Product Tariffs

India's applied tariffs for soybeans and products—as well as other oilseeds and
products—are high by global standards. For soybeans, for example, India's seed,
meal, and oil tariffs are all sharply higher than for any of the world's major
producing and consuming countries. The principal reason for India's high tariffs is
to protect the welfare of oilseed producers, most of whom are small-scale, limited
resource farmers operating under conditions of erratic rainfall.

Although India's soybean and product tariffs are higher than for other major
countries, it is common for soybean producing countries, including the United
States, to provide tariff protection for their soybean and product sectors. For
nearly all major producers, the common pattern of protection is to place higher
tariffs on products than on raw materials, thus supporting higher margins for
processors than without protection. As a result, tariff policies play a role not only
in where soybeans are produced, but also where they are processed.

Applied soybean oil tariffs for major importers

Percent
50

40

30

20

10

0
a

sh
o

a
an

a
a

a
el

na
ic

re
bi
di

EU

ad
de
zu
st

ex
om

Ko
In

hi
ki

an
la
ne

C
Pa

ng
ol

C
Ve

Ba

Source: Agricultural Market Access Database (AMAD).

Applied soybean and product tariffs for major producers

and consumers (ranked by 2002-04 average production)
Percent
50
Seed
40 Meal
Oil
30

20

10

0
a
.

an
il

na

nd
U
y

ia
.S

ad
az

in

di

ua

E
liv

p
U

la
hi
nt

In

an
Br

Ja
ag

Bo
C

ai
ge

Th
ar
Ar

Source: Agricultural Market Access Database (AMAD).

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Table 1
Bound and applied tariffs in India’s oilseed sector
Commodity Bound rate Applied rate1
Percent, ad valorem
Oilseeds 30 30
Oils
Crude
Soybean 45 45
Palm oil 300 80
Peanut 300 75
Sunflower2 300 50/75
Rapeseed 75 75
Refined
Soybean 45 45
Palm oil 300 90
Peanut 300 85
Sunflower 300 85
Rapeseed3 75 45/85
Oilmeals 100 30
1 Applied sales as of March 2006.
2 Applied rate of 50 percent within 150,000-ton quota; 85 percent above quota.
3 Applied rate of 45 percent within 150,000-ton quota; 75 percent above quota.

Source: Ministry of Commerce and Industry, Government of India; USDA/Foreign Agricultural

Service attache reports.

domestic supply, demand, and balance-of-payment conditions. Imports

were particularly restricted during 1989-94, a period corresponding with the
Technology Mission on Oilseeds, a government initiative to boost self-suffi-
ciency in edible oils. Since 1994, when India began conforming to WTO
rules and replacing quantitative trade restrictions with tariffs, oil imports
have been placed under Open General License (OGL), allowing unlimited
imports by private traders subject to applied tariffs (table 1).

Figure 4
Applied crude vegetable oil tariffs in India
Percent ad valorem
90
80
All oils
70 Soy (crude and refined)
60 Palm
50 Sunflower*
Other
40
30
20
10
0
Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan
94 95 96 97 98 99 2000 01 02 03 04 05
*Tariffs for imports within tariff-rate quota.
Source: Ministry of Commerce and Industry, Government of India;
USDA/Foreign Agricultural Service attache reports.

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Since the introduction of a tariff-based import regime in 1994, applied tar-
iffs have evolved from initially high rates (65-85 percent) during 1994-1995
to lower (20-30 percent) tariffs during 1996-2000. They escalated again
during 2001-04 (fig. 4). High WTO bound rates of 300 percent for most
oils have afforded India the flexibility to adjust tariffs upward. The major
exceptions are crude and refined soybean oils, which are bound at 45 per-
cent. Crude sunflowerseed oil (50 percent) and refined rapeseed oil (45 per-
cent) also have relatively low bound tariffs within 150,000-ton tariff-rate
quotas, but only small amounts of these higher priced oils are imported.

The comparatively low 45-percent bound tariff on soybean oil has tended to
limit the scope for upward adjustment of applied tariffs on other oils. This
has been controversial among Indian policymakers who would like to
increase protection for domestic oil and oilseed producers. Large differen-
tials between soybean and palm oil tariffs, such as the current 35 percentage
points, create a market advantage for soybean oil that forces palm oil suppli-
ers to cut prices. The scope for reducing oil imports by raising palm oil tar-
iffs has been limited because palm oil exporters reduce prices to remain
competitive with soybean oil, and because importers substitute soybean oil
for palm oil.

In addition to adjusting tariffs, the Government influences the cost of

imported oils through a system of “tariff rate values,” or administered
import prices used to calculate the tariff revenue due to the Government for
each ton of imported oil. These were introduced in 2000 to prevent under-
invoicing of prices by importers. The tariff values are adjusted periodically
based on world prices. On occasion, however, tariff-rate values for soybean
oil have been above actual market prices, resulting in an effective tariff
above the 45-percent bound rate (Dohlman et al., 2003).

Edible oil trade. India’s oil imports expanded rapidly following the
removal of quantitative restrictions in 1994, rising from an average of about
200,000 tons annually in the early 1990s to 5 million tons, or about 44 per-
Figure 5
Edible oil imports by type, India
Million tons
6
Palm
5 Soybean
Sunflower
4 Rapeseed
Other

0
1973 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05
Source: USDA, Production, Supply, and Distribution database.

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cent of domestic consumption, during 2003-05. Import growth was most
rapid during 1996-2000, when tariffs were relatively low, and was slowed
by higher tariffs during 2001-05 (fig. 5).

Mindful of the price sensitivity of Indian consumers, India’s oil importers

have been highly price sensitive in determining the composition of oils
imported. Palm oil, generally the lowest priced oil, has dominated Indian
imports since the mid-1990s, accounting for about 75 percent of oil imports
during 2003-05. Soybean oil, generally the second cheapest oil in the mar-
ket, accounted for about 23 percent of imports during 2003-05. Higher
priced oils—including sunflower oil and oils traditional to the Indian diet,
such as peanut and rapeseed oil—were imported in only small amounts.

Price is also a key determinant of the origin of oils purchased by Indian

importers. The U.S. share of the Indian soybean oil market declined sharply
when U.S. exports shifted from concessional shipments to commercial sales
after the mid-1990s. The Indian soybean oil market is dominated by
Argentina and Brazil, who offer consistently lower prices than U.S. suppli-
ers (Dohlman et al., 2003; Schnepf et al., 2001).

Meal trade. India is the fifth largest exporter of both soybean meal and
total oil meals, although its exports trail those of the major global
suppliers—Argentina, Brazil, and the United States—by a wide margin.
Indian soybean meal is more competitive in world markets in terms of both
quality and price than other domestically produced meals (fig. 6). Because
soybeans (and sunflowerseed) have been cultivated in India only since the
1970s, they are processed in relatively modern, small- and medium-scale
solvent extraction facilities. Indian soybean meal is competitive in small,
regional markets that favor India’s bagged, as opposed to bulk, product.

The once strong growth in India’s exports of soybean meal has slowed due
to expanding domestic feed use and slower growth in soybean production.
Rapid growth in demand from domestic poultry meat and egg producers has

Figure 6
Oilmeal exports by major type, India
Million tons
4.5
4.0
Soybean
3.5 Rapeseed
3.0 Peanut
Other
2.5
2.0
1.5
1.0
0.5
0.0
1974 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04
Source: USDA, Production, Supply, and Distribution database.

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increased domestic soybean meal prices relative to world prices, reducing
their competitiveness in world markets and their appeal to exporters.

Oilseed trade. India is not a significant trader in oilseeds for processing.

Oilseed imports are restricted by both a 30-percent tariff and by nontariff
barriers. Imports of genetically modified oilseeds are not permitted unless
approved by the Government’s Genetic Engineering Approvals Committee
(GEAC). The GEAC currently has no policy that would permit such
approvals. In addition, a 2002 Plant Quarantine Order requires that ship-
ments be certified free of certain pests or that seeds be “devitalized.” At
present, the only permissible means of “devitalization” is to mechanically
split the seed, a process that adds considerable cost and, if done at the point
of origin, would lead to unacceptable deterioration in quality during transit.

Oilseed Production
India produces a broad range of oilseeds, ranking among the world’s largest
producers of peanut, rapeseed, soybean, cottonseed, and a number of minor
oilseeds. Oilseed yields, however, remain well below world averages, with
limited success in sustaining productivity growth. Government policy gives
priority to protecting oilseed producers by placing quantitative restrictions
or high tariffs on imports of oilseeds and products.

Trends in oilseed area and yields. Area planted to oilseeds has generally
responded to changes in domestic prices associated with changes in trade
policy, and in price policy for competing crops. Growth in oilseed area
accelerated—and grew faster than the world average—during the 1980s,
when stricter controls on imports of oilseeds and products strengthened
oilseed prices relative to competing crops (table 2, fig. 7). However, during
1990-2002—a period that includes the liberalization of oil imports—domes-
tic prices of oilseeds and oils declined relative to other crops and oilseed
area growth slowed significantly. Higher Government minimum support
prices (MSPs) for wheat and rice, important competing crops for oilseeds in
some regions, also slowed the growth in oilseed area during the late 1990s.

Figure 7
Harvested area of major oilseeds in India
Million hectares
35
Soybean
30 Sunflower
Rapeseed
25 Peanut
Cottonseed
20

15

10

0
1970 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04
Source: FAOSTAT, May 2005.

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Table 2
Growth rates of oilseed area, yield, and production, India and world average
Area Yield Production
Oilseed 1970-80 1980-90 1990-02 1970-80 1980-90 1990-02 1970-80 1980-90 1990-02
Percent change
India
Cottonseed 0.4 -0.5 0.5 1.6 3.4 0.8 1.9 2.9 1.3
Peanuts -0.3 1.8 -1.2 0.6 0.5 -0.1 0.3 2.4 -1.1
Rapeseed 1.7 3.4 0.3 -0.4 5.8 0.7 1.4 9.4 1.1
Soybeans 32.3 17.6 7.2 4.5 2.5 0.5 38.3 20.4 7.8
Sunflowerseed 7.1 26.7 1.1 -1.7 -0.1 0.3 5.4 26.5 1.4
Five oilseeds 0.7 2.8 1.0 0.6 2.5 0.5 1.3 5.3 1.6

World
Cottonseed 0.0 -0.3 -0.2 1.9 2.8 0.7 1.9 2.5 0.5
Peanuts -0.4 0.8 1.7 0.8 1.6 1.3 0.4 2.4 3.1
Rapeseed 3.7 4.6 2.1 1.8 3.5 1.2 5.4 8.3 3.3
Soybeans 5.6 1.2 3.1 1.4 0.9 1.5 7.0 2.1 4.7
Sunflowerseed 3.7 2.9 2.1 0.0 1.5 -0.8 3.7 4.5 1.2
Five oilseeds 2.5 1.3 2.0 1.8 1.6 1.2 4.3 3.0 3.2
Source: Computed from FAOSTAT data.

India’s average yields for major oilseeds are 40-60 percent below world
averages and, with the exception of the 1980s, have been growing at a sub-
stantially lower rate (fig. 8). Most oilseeds are grown by small-scale, limit-
ed-resource farmers in areas that are dependent on erratic monsoon rainfall,
with only about 24 percent of oilseed area irrigated. Faced with consider-
able weather-related risk, oilseed producers invest little in improved seeds,
fertilizer, and pesticides. Oilseed farmers also face considerable price risk
because the minimum support prices set for oilseeds are typically either too
low to influence market prices or are not adequately defended by
Government purchases. Government initiatives to extend credit and tech-
nology to oilseed producers, including the 1988-94 Technology Mission on
Oilseeds, have had very fleeting impact.
Figure 8
Oilseed yields, Indian and world average, 2002-04
Tons per hectare
2.5

India World
2.0

1.5

1.0

0.5

0
Cottonseed Peanuts Rapeseed Soybeans Sunflowerseed
Source: FAOSTAT, May 2005.

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Soybeans and rapeseed are the two oilseeds that may have the most poten-
tial for improvements in area, yield, and production. Soybean area contin-
ues to expand outside the traditional area of Madhya Pradesh into the neigh-
boring areas of Rajasthan and Maharashtra, where it competes for land with
other dryland crops, including sorghum, millet, and pulses. Returns to soy-
bean cultivation are helped by strong demand for soybean meal and by
excess capacity in solvent extraction, which creates some competition for
supplies of raw material.

Rapeseed, grown in the winter often in competition with wheat, is the most
heavily irrigated of all the oilseeds, with about 63 percent of area irrigated.
Rapeseed area and yield increased during the 1980s and early 1990s when
high prices boosted plantings on irrigated land. Rapeseed production was
slowed by large hikes in wheat MSPs during the late 1990s, but higher oil
tariffs and lower relative wheat prices could now stimulate another expan-
sion of output.

Producer price policy. The MSP system has had little impact on oilseed
prices, which are formed primarily by trade policy and domestic and world
market prices for oilseeds and products. With India’s large-scale imports,
domestic prices for edible oils are linked closely to tariff-adjusted world
prices, although domestic supplies affect prices during the harvest period.
Similarly, domestic prices of traded oil meals are linked to world prices and
domestic seasonal factors, although some meals are often priced below
world levels. With oilseed imports restricted by tariff and nontariff barriers,
domestic oilseed prices are shaped largely by the prices of their derivative
products, their respective oil and meal extraction rates, and processing costs.

Historical trends in prices for oilseeds reflect the impact of trade policy (fig.
9). Oilseed prices tended to rise relative to other crops through the early
1990s when vegetable oil imports were restricted, then decline following the
liberalization of oil imports. Oilseed prices have turned up in the early
2000s, reflecting oil tariff hikes during 2000-2002 and, possibly, the impact
of higher oilseed MSPs.
Figure 9
Trends in real wholesale prices for selected crops, India
Index (81/82=100)
200
Oilseeds Pulses
180
Wheat Vegetables
160 Rice

140

120

100

80

60
1979 81 83 85 87 89 91 93 95 97 99 01 03
Source: Government of India, Ministry of Finance.

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Although oil and oilseed tariffs emerged as primary policy instruments dur-
ing the 1990s, it is unclear how effectively-and how efficiently-higher tariffs
can achieve the avowed policy objectives of supporting small oilseed pro-
ducers and reducing dependency on oil imports. Because oil accounts for
the smallest physical fraction of the oilseed—ranging from 18 percent for
soybeans to 40 percent for sunflower—the impact of oil tariffs on the
oilseed price is also proportionally small. Benefits to producers are further
reduced if processors and traders fail to transmit the full impact of the oil
tariff into the oilseed price. Another constraint is that high oil tariffs place
most of the proportionally large cost burden of supporting oilseed producers
on India’s mostly low-income consumers.

Oilseed Processing
The Indian oilseed processing sector is characterized by a large number of
relatively small-scale, low-technology plants and substantial excess capacity.
The structure of the industry has been heavily influenced by Government
policies that have: regulated plant scale, capital intensity, and oilseed/prod-
uct marketing; provided incentives for building new capacity; and prevented
imports of oilseeds for processing. Also shaping the industry has been a
domestic demand preference for crude traditional oils, weak effective
demand for quality feed protein, and diverse and erratic supplies of domes-
tic oilseeds for processing.

Processing sector structure, capacity, and costs. The Indian oilseed pro-
cessing industry includes three major processing technologies: (1) tradition-
al mechanical crushing, or expelling, used for oilseeds with relatively high
oil content; (2) solvent extraction for processing oilseeds and expeller cake

Figure 10
India’s oilseed processing sector

Soft seeds Nonsoft seeds 1

(peanuts, rapeseed, sunflower) (soybeans, cottonseed)

Mechanical expellers Expander Solvent extraction

Losses

Expeller oil Expeller oil cake Solvent extracted oil Deoiled cake

Filtration Fertilizer Oil refinery

& waste
Losses Losses
Filtered oil Refined oil

Domestic oil market Domestic feed market Feed export market

1
Solvent extraction is used for raw materials, such as soybeans,cottonseed, and expeller oilcake
with less than 20 percent oil content.

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Table 3
Structure of India’s oilseed processing sector
Process Capacity1
Units Total Average Use rate
Number Million tons Tons/day Percent
Mechanical crushing:
“Ghanis” 130,000 2.0 0.05 10
Expellers 20,000 40.5 7 30-40

Solvent extraction2 766 36.0 157 30-40

Vanaspati 241 4.8 66 35
Oil refining 800 4.7 20 35
1Capacity and use based on raw material; 300 days/year, 24 hours/day basis.
2Includes expander units.
Source: Solvent Extractors’ Association of India.

with less than 20 percent oil content; and (3) expander-solvent extraction, a
hybrid process used for raw materials with higher oil content (fig. 10, table
3). The traditional mechanical crushing industry has two segments: the very
small-scale “ghanis” and the small-scale expellers. The processing industry
also includes an oil refining sector, which primarily refines domestic sol-
vent-extracted oils and imported crude and solvent-extracted oils, and a
“vanaspati” (hydrogenated oil) sector that refines and hydrogenates domes-
tic and imported oils.

Each segment of India’s oilseed processing industry has small capacities and
low technical efficiency compared with other major processing countries.
On average, India’s solvent extraction plants are about one-sixth the size of
those in the United States and the EU and use significantly more power,
steam, and hexane solvent per unit of oilseeds processed. Even India’s
largest integrated expeller-solvent extraction plants are small and high-cost
by international standards.

Indian processing units also have more excess capacity than units in other
major processing countries. On average, Indian expeller and solvent extrac-
Figure 11
Average cost curves for oilseed processing in India
Costs (Rs/ton)
1,200
Average capacity use rate
1,000

800

600 Soft seed processing

400
Soybean solvent extraction
200

0
30 40 50 60 70 80 90 100
Capacity utilization (percent)
Source: ERS estimates.

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tion plants operate only around the domestic raw material harvest, or at
about 30-40 percent of capacity. This contrasts with capacity utilization
rates of 92-96 percent for U.S. plants (Reca, 2003). Low rates of capacity
use compound relatively poor technical efficiency and further increase the
average and marginal costs of processing raw materials, because fixed costs
must be recouped over fewer units of output (fig. 11).

Additional inefficiency arises because some processes are not well integrat-
ed. While it is common to see an oil refinery and/or vanaspati unit com-
bined with a solvent extraction plant, expeller units are often not integrated
with solvent extraction units. As a result, oil and meal production is lost
because significant amounts of expeller cake are not solvent-extracted. In
addition, the costs of solvent-extracting the expeller cake rise, and process-
ing delays reduce the quality of the oil and de-oiled cake.

India’s oilseed processors are able to operate profitably despite their high
costs largely because of the high border protection afforded to vegetable
oils. In addition, because the price of oilseeds is determined by the cost of
processing—together with the market value of the derived oil and
meal—high processing costs dampen oilseed prices, partially offsetting ben-
efits to producers from India’s tariffs on oilseeds and oils.

In the short run—with existing processing capacity and low capacity

use—India’s processors operate their plants at a level where average costs
are high. They can reduce unit processing costs by increasing capacity use.
In the long run, costs can drop further if larger, more technically efficient
plants are built and can operate at high levels of capacity use. Lower pro-
cessing costs would create a stream of benefits to processors that could be
shared with producers (in the form of higher oilseed prices) and consumers
(in the form of lower oil prices).

Processing sector policies. The fragmentation, low technical efficiency,

and excess capacity of India’s oilseed processing industry are largely the
result of government regulatory and trade policies:

• Plant scale restrictions. Under the Small Scale Industry (SSI) reservation
policy, expelling of peanut, rapeseed, sesame, and safflower oils is
restricted to units with investment of Rs 0.5-7.5 million ($10,000-
$170,000), effectively restricting capacities to units small by international
standards. In addition, firms that manufacture oilseed crushing equip-
ment are subject to the same scale limits, restricting use of more modern
technology. These restrictions do not apply to the processing of soy-
beans or sunflowerseed, or to the manufacture of solvent extraction
equipment, so these commodities are processed in relatively large units.

• Movement and storage restrictions. The central and state Governments

have the authority, through the Essential Commodities Act (ECA) and
an array of control orders, to regulate and restrict movement and stor-
age of farm commodities, including oilseeds and products. These reg-
ulations are now seldom enforced, but remain a source of risk that
reduces incentives to invest in larger or vertically integrated units.

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Policy and Industry Structure in India’s Oilseed Markets / ERR-17
Economic Research Service/USDA
• Selective credit controls. Oilseed processors face restrictions on the avail-
ability and cost of credit from commercial banks for storage of oilseeds
and oils. The regulations raise the cost of credit and further limit the
size and capacity use of processing firms.

• Restrictions on oilseed imports. Tariff and nontariff barriers to oilseed

imports limit average capacity use in the processing industry to what
can be achieved from low and variable domestic production. This rais-
es average processing costs.

• Taxes and tax incentives. Oilseeds and products are subject to taxes at the
point of sale and—if transported across state borders—to turnover,
entry, and central sales taxes. These taxes raise the cost of operating
larger enterprises that assemble raw materials or transport products
across state borders. Central, state, and local governments also provide
tax exemptions and other tax incentives to promote construction of new
processing plants, particularly in backward areas. This contributes to
excess processing capacity and to the location of plants where they are
not economically viable or sustainable (World Bank, 1997).

• Futures trading restrictions. From the 1960s until very recently, futures
trading in nearly all oilseeds and products was illegal and oilseed
processors were unable to legally use futures contracts to manage price
risk. The recent legalization of futures trading may eventually provide
an effective risk management tool but, at present, traded volumes
remain small.

Industry consolidation. The last several years have witnessed a trend

toward consolidation of ownership of oilseed processing units by larger
domestic and multinational companies. The trend appears to be driven part-
ly by short-term factors, particularly financial distress in the industry fol-
lowing several poor harvests. But these larger players are also responding
to the potential for cutting costs and increasing profitability, as well as the
appeal of participating in a large and expanding market.

Key to larger players’ efficiency advantage is the cost of investment and

operating capital. Multinational and large domestic firms typically have
access to capital near the London Inter-Bank Offer Rate (LIBOR), which
has averaged between 1 and 4 percent over the last 3 years. In contrast,
domestic firms must borrow commercially at rates ranging from 14-16 per-
cent for smaller firms to 8-10 percent for larger ones. As a result, the con-
solidating companies will be better able to acquire and store raw material
and boost capacity use rates. Consolidating firms are also likely to achieve
cost savings by establishing backward (to primary markets or farmers) and
forward (to wholesaling and retailing) links. They may also have the advan-
tage of investing in larger, more efficient solvent extraction plants.

Consolidating firms face risks from enforcement of movement or storage

restrictions under the ECA, as well as higher costs from taxes on interstate
movements. So far, these factors have not been significant deterrents to con-
solidation. It is not yet clear how significant the consolidation trend will
become, but it could lead to closure of some surplus capacity as smaller firms
with high operating costs and low capacity use find it difficult to compete.

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Policy and Industry Structure in India’s Oilseed Markets / ERR-17
Economic Research Service/USDA